In the early months of 2017, nearly 400 CIOs, treasurers, and other senior decision-makers — each representing a unique entity and from all sectors of the global economy — responded to the J.P. Morgan Global Liquidity Investment PeerViewSM survey. They participated at an important juncture, as investors face recent or approaching changes in the regulatory, interest rate, economic and political arenas. On all fronts, investors are re-evaluating their cash investment decision-making, looking for the strategies and solutions that can best help them navigate the changing environment.
That process — essential but never simple — will greatly benefit from a peer comparison. As firms consider how their policies and practices resemble, and differ from, those of their peers, the J.P. Morgan Global Liquidity Investment PeerView survey can serve as an indispensable industry benchmark.
Here are some key findings from the survey:
Investment in money market funds still strong
Based on the market outlook for next year, over 60% of respondents will continue with the same allocation to money market funds (MMFs), while 22% will increase their allocations to stable NAV (SNAV) funds and 20% to floating NAV (FNAV) funds. Money market funds and bank obligations account for the majority of cash balance allocation. Nearly 40% of respondents cited money market funds as their chosen vehicle for money moved off a bank balance sheet—by far the most popular placement.
In many ways, the regulatory arena has been transformed since our last survey in 2015. Respondents are grappling with the implementation of money market reform in the US and the approach of reform in Europe, as well as the effects of Basel III around the globe. In Europe, 44% of respondents said they need more time and/or information before they decide on their preferred money market fund structure. Among those considering new structures, 43% ranked risk of gating or a liquidity fee as the most important factor in their decision-making process.
Investment policy changes
More respondents are updating their investment policies to ensure that they provide the flexibility needed in the new rate and regulatory environment. Notably, 48% of respondent policies now permit floating NAV funds, up from 32% in 2015. Nearly a third of respondents are looking to add FNAV funds to their list of allowable investments. Changing an investment policy is rarely a simple undertaking. More than three-quarters of respondents said it would take a moderate or significant effort to implement a change—suggesting that planning should begin well in advance.
Shifting rate environment, search for yield
In a still-low rate environment, investors continue to search for yield and reassess their appetite for risk. Nearly two-thirds of respondents said they will select money market funds for their cash investments if bank deposit rates lag. In the face of negative interest rates in euro and/or sterling-denominated instruments, a large majority of respondents are considering policy changes to allow increased credit risk, more interest rate risk and the use of currency swaps.
Keener need for cash segmentation
Liquidity investors are re-evaluating their investment strategies to meet the demands—and seize the opportunities—of an evolving rate and regulatory environment. Many respondents have determined that they need to consider new investment solutions, including floating NAV funds and more customized portfolios. Cash segmentation—categorizing cash by liquidity needs—is often a key component of the re-evaluation process. More than 70% of respondents can forecast their cash flows out for a month or longer. Just under half can forecast out a quarter or longer.
Moving back into prime funds
Only 37% of US-based respondents are currently invested in a prime money market fund, down from 63% in 2015. A majority transitioned assets to a government money market fund in the wake of new SEC 2a-7 rules. Over 50% of US investors who transitioned assets from a prime to a government MMF cited comfort level with floating NAV and gates/fees as the primary factor in reconsidering prime. Among respondents who transitioned assets out of prime MMFs, nearly half would consider moving back if prime offered an excess yield of between 15 basis points and 50 basis points.
Conclusion: partnership and peerView
In today’s challenging rate and regulatory environment, investors will be looking for strong investment partners who can help them understand the implications of new regulations and fund structures, offer guidance on cash segmentation and provide insights into the global rate outlook. Never has it been more important for financial decision-makers to understand how their peers are positioning portfolios for the coming changes.
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